Financial Performance Analysis

The provided content appears to be a financial analysis report for several years, covering debt equity ratio, debt ratio, equity ratio, liquidity (current ratio and quick ratio), and profitability (net profit margin and gross profit margin). The data includes various financial metrics such as total liabilities, total assets, net income, sales revenue, gross income, etc. for each year from 2012 to 2016.

FINANCIAL REPORTING

BHP Billiton vs Rio Tinto
Executive summary
Two companies can be properly evaluated and differentiated with the help of their annual
report. The same can be done by shedding light on the financing sources and using the
financial statements to compute ratios. In this report, BHP Billiton and Rio Tinto has been
selected, both a pioneer in the resource sector. The two companies are selected from the
same company for the purpose of better presentation. The report initiates with the
introduction of the both the company followed by financing sources and the capital structure.
At the end an evaluation is made of the performance, operations and profitability of the
companies.
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BHP Billiton vs Rio Tinto
Contents
Introduction...........................................................................................................................................3
BHP Billiton............................................................................................................................................3
Framework............................................................................................................................................3
Sources of Financing..............................................................................................................................3
Capital Structure and Financial ratio.....................................................................................................4
Financial ratio........................................................................................................................................5
Rio Tinto................................................................................................................................................6
Trend.....................................................................................................................................................6
Framework............................................................................................................................................6
Finance Sources.....................................................................................................................................7
Capital Structure and financial ratio......................................................................................................7
 Capital Structure............................................................................................................................7
 Financial ratio................................................................................................................................7
Comparison...........................................................................................................................................8
 BHP Billiton has higher exposure of Oil and Gas..........................................................................8
 Flexibility......................................................................................................................................8
Differences............................................................................................................................................8
Management of Capital.........................................................................................................................8
Strategies of Credit................................................................................................................................9
Findings...............................................................................................................................................10
Recommendation................................................................................................................................11
References...........................................................................................................................................12
Appendix.............................................................................................................................................13
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BHP Billiton vs Rio Tinto
Introduction
BHP Billiton
BHP is a pioneer in the resource industry and has its presence in the global arena. It is one of
the biggest producers of commodities that have iron ore, copper, coal, etc. Further, it has
enhanced its activities to conventional and unconventional oil, coal and gas. It is regarded as
the biggest producer of commodities such as iron ore, silver, nickel, etc. The main aim of the
company is to own, as well as have an operation on the low-cost assets that are divided by
geographical constraint and market. It strives to cater to the need of the customers through its
resources and growth. The main aim is to extract oil, gas and other minerals from various
locations of Australia (BHP Billiton, 2016). The products of BHP can be traced all around
the globe and the major sales can be tracked in Singapore, as well as Houston. The workforce
consists of 1, 23,850 employees with other contractors that have its reach to more than 130
destinations (BHP Billiton, 2016). The long-term view of the company helps the company to
cement a strong position in the market. The operations and movement of the company is a
proper indicator of the power and fundamentals of the company and has provided a strong
support towards economic growth. BHP Billiton is dual listed and has its headquarters in
Australia. The primary or the main listing is on the Australian Stock Exchange.
Framework
The corporate planning of BHP Billiton is strong enabling the company to meet the
challenges that pertain to the external environment and enables to increase the total return.
The phase that is starting provides the development of the central case that enables bottom up
assessment (BHP Billiton, 2016). The planning process is structured in a manner that enables
to elbow many uncertainties that exist globally. Moreover, the framework helps in the
structuring of the external factors that contains political, technical and governance. Further,
the presence of governance and the compliance process makes it sure that the internal control
is assessed and the practices do not suffer (Brealey et. al, 2011). Thereby, the framework is
structured in a manner that eliminates the situations that are adverse in nature.
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BHP Billiton vs Rio Tinto
Sources of Financing
The net debt of BHP Billiton consists of liabilities that bear interest and the in tune to this, the
group issued Global bonds that sum to US$ 5 billion and consisted of Senior floating rate
notes of value US$500. Further, the group consisted no commercial papers that are supported
by credit facilities. In the year 2015, the net financing cash flow enhanced to US$284 that
increased sharply from US$8.3 million. The company used a hybrid of multi currency and the
lower dividend was paid as per the new structured policies. The main aim of the group is to
own, as well operate assets that have large life, low cost, and the new policy that contains
diversified by market and geography. The monitoring of the group is due with the aid of
gearing ratio, the ratio that can be termed as net debt to net debt in addition to assets. The
exposure of the group is present to the interest rate risk on the borrowings that is outstanding
and other investments (BHP Billiton, 2016). The management of the interest rate risk is done
through the strategy of portfolio risk management. The group contains debt that is issued at
rates that are fixed in nature. Further, the exposure of the group is even present to the interest
rate swaps.
The activities of finance comprise of receipts from liabilities that have an interest bearing and
other earnings from the debt related tools, liabilities repayment that has an interest bearing
tag, the revenue from the ordinary shares, buy back, dividend payment, etc. These are the
cash flow from financing activities.
Further, the component of equity consists of share capital, reserves, treasury shares and
retained earnings. Moreover, the share capital that is issue consisted of shares that were
supported by public, preferences and the treasury shares (BHP Billiton, 2016).
Capital Structure and Financial ratio
The capital structure of any company is denoted through the debt equity ratio, debt ratio, and
the equity ratio. In the case of BHP Billiton, it is noted that the proportion of debt is higher in
all the five years and has crossed 1 meaning the stress of the debt is high. Further, it indicates
that the capital of the company is more concentrated on debt. Hence, a huge outflow of the
funds will happen by way of interest. The equity ratio of the company stands below 0.50
which means the company has standard equity balance. Higher the equity ratio the best will
be the situation (Davies & Crawford, 2012). Overall the capital structure means that more
reliance is in debt.
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BHP Billiton vs Rio Tinto
Financial ratio
As per the computation, it can be commented that the liquidity of the company is strong and
hence, BHP Billiton can meet the obligations. The current assets are sufficient to match the
current liabilities. Further, both current and quick ratio has increased over the span of five
meaning stressing on the strong liquidity position of the company.
On the other hand, the gross profit of the company is formidable that indicates the strong
control over the cost of sales. However, the net profit margin declined in the current year that
is a big alert and negative sign on the part of the management (Horngren, 2013).
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BHP Billiton vs Rio Tinto
Rio Tinto
Rio Tinto, listed on the ASX is a leading company in the mining field and is completely
based on the processing of minerals. It has its presence worldwide and a mining group and
mainly emphasizes on mining, as well as processing of mineral resources of the Earth. The
goal of the company is to generate high returns that are sustainable in the eyes of the
shareholders and hence, establish a portfolio that is efficient in nature. Rio has its presence in
more than 35 countries and has a workforce of more than 51,000 people (Rio Tinto, 2016). It
has its headquarters in the UK. With a presence on a global scale, the group has efficiency in
terms of providing correct expertise. The main achievement of the company is with respect to
the sustainable development. The group functions in a manner that is containing long-term
benefits for the customers and the society as a whole. Strategic advantages like access to the
huge and best quality bauxite make it immensely successful.
Trend
The position of Rio Tinto stands strong due to the strong balance sheet, assets of world class
and containing strong drivers of performance. The talented employees are an asset when it
comes to the period of volatility (Rio Tinto, 2016). Along with the strong infrastructure and
an emerging economy, the long-term perspective of the industry is strong. The company has
strong discipline in terms of capital and has strong tamed the capital expenditure. The capital
expenditure was reduced from US$4.7 billion in 2015 to the US $3 billion in 2016. The net
debt was decreased considerably from US$13.8 billion to the US $9.6 billion.
Framework
Rio Tinto is mainly engaged with risk management that is important for the smooth running
of the organization. It helps in creation, as well as an increment in the value. The risk
structure provides a general idea that the company stresses on leaders for the creation of
value by the management of the business. The framework provides a general idea that the
risk management is another important aspect on how to create value. It is vital for the smooth
functioning of the company (Albrecht et. al, 2011). The importance of identification and
management of risk rests with every employee and the leaders in the organization.
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BHP Billiton vs Rio Tinto
Finance Sources
From the annual report, it is clear that the financial resources or access to the company are
not limited or constrained. In 2013, bonds were issued by Rio Tinto. Further, it associated
with finance limited that helped in the creation of additional amount that stands at $7.5
billion. Moreover, the group has strong links with the bank and of a bilateral nature. To
ensure a strong momentum, Rio issued 1,436,542 shares from treasury and 951 allotments of
new shares were done. The purchase by trustees stood at 842000 shares (Rio Tinto, 2016).
Further, the registrar purchased 1,089,189 shares so that obligations can be honored. The
share capital comprised of reserves retained earnings, and share premium. Also, the financing
structure consisted of payment related to dividend from the equity shares, repayment of
borrowings, and purchase of interest that appears to be of non-controlling nature.
Capital Structure and financial ratio
 Capital Structure
The capital structure of Rio Tinto clearly indicates that it is a debt ridden company as in all
the five years the debt equity ratio exceeds 1. This means that the company has an over
reliance on debt. The equity ratio projects that the equity is below 0.50 that does not boast a
strong picture. Hence, a major chunk of profit will go towards interest payment (Graham &
Smart, 2012).
 Financial ratio
Going by the computation, it can be commented that Rio Tinto has liquidity as projected by
the current and the quick ratio. The current ratio is next to the standard ratio of 2:1 implying a
perfect ratio. However, the quick ratio is above 1:1 meaning the funds of the company can be
invested elsewhere and income can be generated (Libby et. al, 2011).
The gross profit of the company is properly balanced. However, there have been fluctuations
in the past five years. However, the net profit margin indicates that the company falters when
it comes to the management of expenses. It has fluctuated in all the five years and been
negative too.
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BHP Billiton vs Rio Tinto
Comparison
 BHP Billiton has higher exposure to Oil and Gas
The earnings of Rio is majorly concentrated from the aluminum and iron ore that provides a
great contribution to earnings of $1.12 billion and $3.95 billion that was projected in the year
2015 and the total earnings stood at $4.54 billion. It needs to be noted that Rio was linked to
operation in copper and coal that led to an inflow of $274 million of segment earnings the
previous year. On the other hand, BHP earnings come from the iron ore and have strong
fundamentals in coal, as well as copper (BHP, 2016). This indicates that both the companies
have a strong concentration on iron ore and even in coal and copper.
The presence of energy can be witnessed in the case of BHP while Rio lacks in this regard.
The sensitivity of the change in profit to price changes of BHP can be answered through the
following. The profit after tax of BHP has increased by $600 million if the crude price will
increase by $10 per barrel. In the short-term, the exposure of BHP to energy is inefficient
because the crude prices have declined to a considerable extent. Hence, the concentration is
one iron ore.
 Flexibility
The balance sheet of both the companies is strong or effective in nature with low cost of
production that helps both the companies to cater to the demand of the stakeholders. It
enables both these companies to consider the supply that is in excess. Therefore, it can be
said that both the companies have strong fundamentals and better results can be attained in
this regard (Melville, 2013).
Differences
Management of Capital
When it comes to investors of Rio and BHP it can be said that the investors were dejected
owing to the deficit in the capital return. The capital management of BHP is weak and hence,
far from attainment of the apex (Northington, 2011). On the other hand, Rio Tinto stresses
mainly on the shareholder return. However, the capex of Rio declined at a strong pace as
compared to BHP.
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BHP Billiton vs Rio Tinto
Strategies of Credit
BHP stresses mainly on maintenance of a strong credit rating that is ‘A’ whereas Rio is ready
to forgo one grade of credit rating so that the growth strategies can be executed.
Approximately 80% of the Rio earnings is generated through the operations of iron ore and
the decline in the prices of iron ore is structural in feature meaning that it does not disturb the
momentum of the company (Rio Tinto, 2016). The initiatives of productivity and weakness
in the local currency may give support to the company. On the contrary, the prices of shares
of BHP are getting swayed by the petroleum product exposure.
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BHP Billiton vs Rio Tinto
Findings
 Both the companies are debt ridden and hence heavily rely on debt. Therefore,
investment in such companies is prone to risk as the company needs to pay huge
interest for the debt undertaken (Lapsley, 2012).
 The profitability of both the companies has undergone immense change. the
fluctuation has happened as it both the companies are under the mineral resource
group. The external scenario heavily influences the scenario (Correia et. al, 2005).
 If the share price of BHP surges there will be more capital gain to the investors as
compared to Rio.
 The ability to bounce back is more prominent in the case of BHP as it has more strong
fundamentals as compared to Rio Tinto.
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BHP Billiton vs Rio Tinto
Recommendation
The above report signifies that both the companies are into the fierce competition and
whenever there is a downfall in the market; the market condition of both the countries has
plunged. It is, therefore, evident that the market scenario plays a leading role in the progress
of the both the company. Going by the overall report, it can be commented that both the
companies should not be considered for investment as it is running under huge debt. The ratio
analysis is a clear indicator of that. Debt ridden companies are prone to heavy drawbacks and
hence, must be avoided.
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BHP Billiton vs Rio Tinto
References
Albrecht, W, Stice, E & Stice, J 2011, Financial accounting, Mason, OH: Thomson/South-
Western.
BHP Billiton 2016, BHP Billiton Annual Report and accounts 2016, viewed 11 September
2017 http://www.bhp.com/investor-centre/annual-reporting-2016
Brealey, R, Myers, S. and Allen, F 2011, Principles of corporate finance, New York:
McGraw-Hill/Irwin.
Brealey, R. A, Myers, S. A & Marcus, A. J., 2015. Fundamentals of Corporate Finance, 8th
ed. Australia: McGraw-Hill Irwin.
Correia, C, Mayall, P, O'Grady, B & Pang, J 2005, Corporate Financial Management, 2nd
ed. Perth: Skystone Investments Pty Ltd.
Davies, T & Crawford, I 2012, Financial accounting, Harlow, England: Pearson..
Graham, J & Smart, S 2012, Introduction to corporate finance, Australia: South-Western
Cengage Learning.
Horngren, C 2013, Financial accounting, Frenchs Forest, N.S.W: Pearson Australia Group.
Lapsley, I. 2012, ‘Commentary: Financial Accountability & Management’, Qualitative
Research in Accounting & Management, vol. 9, no.3, pp. 291-292.
Libby, R, Libby, P & Short, D 2011, Financial accounting, New York: McGraw-Hill/Irwin.
Melville, A 2013, International Financial Reporting – A Practical Guide, Pearson, Education
Limited, UK
Northington, S 2011, Finance. New York, NY: Ferguson's.
Rio Tinto 2016, Rio Tinto Annual Report and accounts 2016, viewed 11 September 2017
http://www.riotinto.com/documents/RT_2016_Annual_report.pdf
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BHP Billiton vs Rio Tinto
Appendix
Capital Structure of BHP Billiton
Debt Equity Ratio
2012 2013 2014 2015 2016
Total Debt 63403 67445 72270 59812 64663
Total Equity 65870 70664 79143 64768 54290
Debt Equity Ratio 0.962547442 0.954446394 0.913157196 0.923480731 1.191066495
Debt Ratio
2012 2013 2014 2015 2016
Total liabilities 65870 70664 79143 64768 54290
Total Assets 129273 138109 151413 124580 118953
Debt Ratio 0.509541822 0.511653839 0.522696202 0.519890833 0.456398746
Equity Ratio
2012 2013 2014 2015 2016
Total Equity 65870 70664 79143 64768 54290
Total Assets 129273 138109 151413 124580 118953
Equity Ratio 0.509541822 0.511653839 0.522696202 0.519890833 0.456398746
Liquidity Ratio
Current ratio
2012 2013 2014 2015 2016
current assets 20451 19786 22296 16369 17714
current liabilities 22034 20372 18064 12853 12340
current ratio 0.928156485 0.971235028 1.234278122 1.273554812 1.435494327
Quick Ratio
2012 2013 2014 2015 2016
current assets 20451 19786 22296 16369 17714
stock 6233 5822 6013 4292 3411
current liabilities 22034 20372 18064 12853 12340
current assets-stock 14218 13964 16283 12077 14303
quick ratio 0.645275483 0.685450618 0.901406112 0.93962499 1.159076175
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BHP Billiton vs Rio Tinto
Profitability
Net Profit Margin
2012 2013 2014 2015 2016
Net Income 15417 10876 13832 1910 -6385
Sales Revenue 72226 65968 67206 44636 30912
Net Profit Margin
[(Net Profit after tax/Sales Revenue)*100] 21.35 16.49 20.58 4.28 -20.66
Gross profit Margin
2012 2013 2014 2015 2016
Gross Income 45555 40839 43821 29737 22261
Sales Revenue 72226 65968 67206 44636 30912
Gross Profit Margin
[(Gross Profit /Sales Revenue)*100] 63.07 61.91 65.20 66.62 72.01
Capital Structure of Rio Tinto
Debt Equity Ratio
2012 2013 2014 2015 2016
Total Debt 70708 65139 61542 54215 49973
Total Equity 46865 45886 46285 37349 39290
Debt Equity Ratio 1.508759202 1.419583315 1.32963163 1.451578356 1.271901247
Debt Ratio
2012 2013 2014 2015 2016
Total liabilities 70708 65139 61542 54215 49973
Total Assets 117573 111025 107827 91564 89263
Debt Ratio 0.601396579 0.586705697 0.570747586 0.592099515 0.559840023
Equity Ratio
2012 2013 2014 2015 2016
Total Equity 46865 45886 46285 37349 39290
Total Assets 117573 111025 107827 91564 89263
Equity Ratio 0.398603421 0.413294303 0.429252414 0.407900485 0.440159977
Liquidity
Current ratio
2012 2013 2014 2015 2016
current assets 19223 22282 21125 15554 15086
current liabilities 13821 15190 12220 10046 9362
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BHP Billiton vs Rio Tinto
current ratio 1.390854497 1.466886109 1.728723404 1.548277922 1.611407819
Quick Ratio
2012 2013 2014 2015 2016
current assets 19223 22282 21125 15554 15086
stock 6136 5737 4350 3168 2937
current liabilities 13821 15190 12220 10046 9362
current assets-stock 13087 16545 16775 12386 12149
quick ratio 0.94689241 1.089203423 1.372749591 1.232928529 1.297692801
Profitability
Net Profit Margin
2012 2013 2014 2015 2016
Net Income -2990 3665 6527 -866 4617
Sales Revenue 50967 51171 47664 34829 33781
Net Profit Margin
[(Net Profit after tax/Sales Revenue)*100] -5.87 7.16 13.69 -2.49 13.67
Gross profit Margin
2012 2013 2014 2015 2016
Gross Income 13431 15067 13754 6910 6982
Sales Revenue 50967 51171 47664 34829 33781
Gross Profit Margin
[(Gross Profit /Sales Revenue)*100] 26.35 29.44 28.86 19.84 20.67
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